Budget 2018 was the last complete budget that the current government announced prior to the nation-wide general elections of 2019. Many experts and the public in general had expected that this budget would feature a number of populist policies including tax benefits for a wide class of individuals. About two months later, we know for a fact that many of those expectations were not met. Let’s see how some key budget announcements actually turned out with respect to the tax outgo of individual tax payers.
Return of LTCG on Equities
What many experts had predicted did happen this time around, the LTCG holiday on equities finally came to an end. Till fiscal 2017-18, long term capital gains on equities such as shares, equity schemes and equity oriented hybrid schemes was nil. Sadly, that’s no more the case as a 10% tax on LTCG gains is now applicable, subject to some key terms and conditions. The first condition is that long term gains on equities have to exceed Rs. 1 lakh during the applicable fiscal in order to be taxable. This takes care of the worry of most small investors as gains of Rs. 1 lakh on your investments are not that easy to achieve. Secondly, there is a grandfathering clause i.e. returns will not be taxed up to a certain extend. Budget 2018 has proposed that gains of equities will be tax free till the 31st of January, 2018. So in case you have old investments that have appreciated significantly over time, their value is protected and not taxed to a large extent by this grandfathering clause. Also prospective and existing investors need to remember that till date there are still no indexation benefits in case of equity gains.
Equity Fund Dividends now subject to DDT
This announcement in Budget 2018 has introduced dividend distribution tax (DDT) on equity scheme dividends. DDT is payable directly to the tax authorities by the company/fund house announcing dividends for its shares or equity schemes, hence the investor does not need to worry about an increased tax burden. But, this has been perceived as a negative move by many experts as the introduction of DDT at 10% potentially decreases the long term returns that an investor of dividend plans is liable to receive. That said, since debt schemes were already subject to DDT, the introduction of DDT on equities is expected to bring parity between various types of dividend paying schemes operating in the market. One does need to keep in mind that in case of equity investments, the potentially higher returns still make them a solid investment choice. That said, it is better to go for the growth option unless you need a regular income.
Standard Deduction of Rs. 40,000 Introduced
This budget has kept the tax rate unchanged from the previous year. There has of course been a change in the tax treatment of medical and transport allowance with the introduction of the Rs. 40,000 annual standard deduction. The earlier limits on medical allowance and transport allowance were limited to Rs. 15,000 and Rs. 19,200 respectively. This move is expected to provide only a slight benefit to salaried individuals and pensioners in the lower income bracket.
Health and Education Cess Hiked on Personal Income Tax
Till FY 2017-18, you total tax burden includes components such as surcharge, education cess and higher education cess at 2%, 2% and 1% respectively payable on top of the income tax owed. The surcharge is only applicable to high net-worth individuals hence many salaried individuals don’t have to pay it. On the other hand, education and higher education cess is payable by all tax payers. From AY 2019-20 onwards, the health and education cess has been increased to 4%, hence the total tax liability is set to increase for most individuals whether salaried or self employed from the coming assessment year. The proceeds from this cess would be used by the government to fund the education and health expenses of economically weaker Indians as per the Budget 2018 announcement.
Senior Citizen-specific Announcements
The one group of individuals who have apparently benefited to the greatest extent from this year’s budget are the senior citizens. For starters, the taxable income limit from interest income has been increased to Rs. 50,000 for senior citizens in AY 2019-20 as compared to the previous level of Rs. 10,000 annually. The Rs. 10,000 ceiling on tax exempt interest income will still continue to apply for resident Indians below the age of 60 years. In case of tax saving investments, Section 80 D or health and medical expenditures now feature exemption of up to Rs. 50,000 annually as compared to the previous Rs. 30,000 limit. Additionally, an amendment in the subsection, 80DDB will now allow senior as well as very senior citizens to claim tax deductions up to Rs. 1 lakh annually for treatment of specific critical illnesses. The previous limits under this section were Rs. 60,000 and Rs. 80,000 per annum for senior and very senior citizens.
As mentioned in earlier sections, the new tax regime and rules are only capable of providing minor benefits to those belonging to lower income levels. For higher income individuals, the new rules of taxation will result in an increased tax burden as illustrated in the following table.
Table1. Table showing Tax Payable by Different Income Groups across taxpayer categories of below 60 years and above 60 to below 80 years *.
|Taxable Income (Rs.)||Tax Payer less than 60 years of Age||Tax Payer above 60 and less than 80 years of age|
|FY 2017-18||FY 2018-19 (projected)||FY 2017-18||FY 2018-19 (projected)|
|5 lakhs||Rs. 2575||Rs. 2298||Zero||Zero|
|15 lakhs||Rs. 2,24,025||Rs. 2,24,390||Rs. 2,21,450||Rs. 2,21,790|
|25 lakhs||Rs. 5,33,025||Rs. 5,36,390||Rs. 5,30,450||Rs. 5,33,790|
|100 lakhs||Rs. 31,35,578||Rs. 31,64,029||Rs. 31,32,745||Rs. 31,61,169|
*The table is for illustrative purposes only and uses the following assumptions:
- The entire 80C limit of Rs. 1.5 lakhs has been utilized.
- The medical and travel allowance of Rs. 15,000 and Rs. 19,200 of FY 2017-18 have been completely utilized.
- The statutory deduction of Rs. 40,000 has been completely utilized for FY 2018-19 projections.
Surcharge on income over Rs. 50 lakhs is 10%, while 15% surcharge is applicable for annual income exceeding Rs. 100 lakhs.